Chapter01-Introduction to managerial economics (1).pptx

intoduction to ecnomics

1. MSC5200-Managerial Economics 1- 1 Topic 1: Introduction to Managerial Economics

2. Managerial Economics-Course Outline 1- 2 Objectives of This Course Explain the nature and scope of managerial economics Identify the role of economics in decision making Learn to think strategically by considering the economic implications of business decisions Understand pricing strategies and revenue management techniques

3. Managerial Economics-Course Outline 1- 3 Learning Outcomes Understand demand and supply analysis and its practical implications Ability to conduct marginal analysis, identify production and cost structure of firms Analyze different market structures and their dynamics Use of econometric techniques to analyze economic decision making process D:\pide data\managerial economics\managerial economics FFU.docx

4. Managerial Economics-Course Outline  Week Topics/ Content Teaching Method Evaluation Method 1   Topic I : Introduction   Introduction to Managerial Economics The Nature and function of Profits   Lecture/Slides/ Discussion   Class Participation Mid Term Exam   2 Topic Two: Market Forces: Demand and Supply   Market Demand Curve Market Supply Curve Market Equilibrium   Lecture/Slides/ Discussion       Class Participation/ Quiz Mid Term Exam Assignment 3 Topic Two: Market Forces: Demand and Supply Price Restrictions Comparative Statics     Lecture/Slides/ Discussion   Class Participation/ Quiz Mid Term Exam 4 Topic Three: Quantitative Demand Analysis   The Elasticity Concept Demand Functions       Lecture/Slides/ Discussion     Class Participation/ Quiz Mid Term Exam Assignment 5 Topic Three: Quantitative Demand Analysis   Regression Analysis   Lecture/Slides/ Discussion     Class Participation/ Quiz Mid Term Exam 6 Topic Three: Quantitative Demand Analysis   Demand Forecasting   Lecture/Slides/ Discussion     Class Participation/ Quiz Mid Term Exam Assignment 1- 4

5. Managerial Economics-Course Outline  Week Topics/ Content Teaching Method Evaluation Method 7 Topic Four: The Theory of Individual Behavior   Consumer Behavior Constraints Consumer Equilibrium Indifference Curve Analysis & Demand Curves   Lecture/Slides/ Discussion     Class Participation/ Quiz Mid Term Exam   8 Topic Five: The Production Process and Costs   Production Analysis   Lecture/Slides/ Discussion     Class Participation/ Quiz Mid Term Exam   Midterm Exam 10 Topic Five: The Production Process and Costs Cost Analysis Multi-Product Cost Functions Discussion on term paper topics     Lecture/Slides/ Discussion   Class Participation/ Quiz Mid Term Exam Assignment Term paper   11 Topic Six: Market Structure and Pricing Practices   Perfect Competition Discussion on term paper topics       Lecture/Slides/ Discussion   Class Participation/ Quiz Mid Term Exam Assignment Term paper   1- 5

6. Managerial Economics-Course Outline  Week Topics/ Content Teaching Method Evaluation Method 12 Topic Six: Market Structure and Pricing Practices   Monopolies Discussion on term paper/methods discussion     Lecture/Slides/ Discussion   Class Participation/ Quiz Mid Term Exam Assignment Term paper   13 Topic Six: Market Structure and Pricing Practices   Monopolistic Competition Discussion on term paper/discussion on findings         Lecture/Slides/ Discussion   Class Participation/ Quiz Mid Term Exam Assignment Term paper   14 Topic Six: Market Structure and Pricing Practices   Oligopoly Market       Lecture/Slides/ Discussion   Class Participation/ Quiz Mid Term Exam Assignment Term paper   15,16 Topic Seven: Risk Analysis and Capital Budgeting     Lecture/Slides/ Discussion   Class Participation/ Quiz Mid Term Exam Assignment Term paper   Final Exam 1- 6

7. Managerial Economics-Course Outline 1- 7 Grade Distribution Assignments 10 % Term paper/Viva 10 % Quizzes 10 % Midterm 20 % Final Exam 50 % Total: 100 %

8. Managerial Economics - Introduction Manager A person who directs resources to achieve a stated goal. Economics The science of making decisions in the presence of scare resources. Managerial Economics The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal. 1- 8

9. Managerial Economics II. The Economics of Effective Management Identify Goals and Constraints Recognize the Role of Profits Five Forces Model Understand Incentives Understand Markets Marginal (Incremental) Analysis Recognize the Time Value of Money 1- 9

10. Identify Goals and Constraints Sound decision making involves having well-defined goals . Leads to making the “right” decisions. In striking to achieve a goal, we often face constraints . Constraints are a product of scarcity. 1- 10

11. Economic vs. Accounting Profits Accounting Profits Total revenue (sales) minus dollar cost of producing goods or services. Reported on the firm ’ s income statement. Economic Profits Total revenue minus total opportunity cost. 1- 11

12. Opportunity Cost Accounting Costs The explicit costs of the resources needed to produce goods or services. Reported on the firm ’ s income statement. Opportunity Cost The cost of the explicit and implicit resources that are foregone when a decision is made. Economic Profits Total revenue minus total opportunity cost . 1- 12

13. Recognize the Role of Profits Profits signal to resource holders where resources are most highly valued by society Profits signal the holders of resources when to enter and exit particular industries Adam Smith – Wealth of nations- self interest leads to societal benefit By moving scarce resources toward the production of goods most valued by society, the total welfare of society is improved. 1- 13

14. Sustainable Industry Profits 2.Power of Input Suppliers Supplier Concentration Price/Productivity of Alternative Inputs Relationship-Specific Investments Supplier Switching Costs Government Restraints 3.Power of Buyers Buyer Concentration Price/Value of Substitute Products or Services Relationship-Specific Investments Customer Switching Costs Government Restraints 1. Entry Entry Costs Speed of Adjustment Sunk Costs Economies of Scale Network Effects Reputation Switching Costs Government Restraints 5. Substitutes & Complements Price/Value of Substitues Products or Services Price/Value of Complementary Products or Services Network Effects Government Restraints 4.Industry Rivalry Switching Costs Timing of Decisions Information Government Restraints Concentration Price, Quantity, Quality, or Service Competition Degree of Differentiation The Five Forces Framework 1- 14

15. Understanding Firms’ Incentives Incentives play an important role within the firm. Incentives determine: How resources are utilized. How hard individuals work. Managers must understand the role incentives play in the organization. Constructing proper incentives will enhance productivity and profitability. 1- 15

16. Understanding Market Market ---Buyers and Sellers meet For every buyer of a good there is a corresponding seller. The final outcome of the market process, then, depends on the relative power of buyers and sellers in the marketplace. Rivalry guides the market process 1- 16

17. Market Interactions Consumer-Producer Rivalry Consumers attempt to locate low prices, while producers attempt to charge high prices. Consumer-Consumer Rivalry Scarcity of goods reduces the negotiating power of consumers as they compete for the right to those goods. Producer-Producer Rivalry Scarcity of consumers causes producers to compete with one another for the right to service customers. The Role of Government Disciplines the market process. 1- 17

18. Control Variable Examples: Output Price Product Quality Advertising R&D Basic Managerial Question: How much of the control variable should be used to maximize net benefits? Marginal (Incremental) Analysis 1- 18

19. Net Benefits Net Benefits = Total Benefits - Total Costs Profits = Revenue - Costs 1- 19

20. Marginal Benefit (MB) Change in total benefits arising from a change in the control variable, Q: Slope (calculus derivative) of the total benefit curve. 1- 20

21. Marginal Cost (MC) Change in total costs arising from a change in the control variable, Q: Slope (calculus derivative) of the total cost curve 1- 21

22. Marginal Principle To maximize net benefits, the managerial control variable should be increased up to the point where MB = MC . MB > MC means the last unit of the control variable increased benefits more than it increased costs. MB < MC means the last unit of the control variable increased costs more than it increased benefits. 1- 22

23. The Geometry of Optimization: Total Benefit and Cost Q Total Benefits & Total Costs Benefits Costs Q* B C Slope = MC Slope =MB 1- 23

24. The Geometry of Optimization: Net Benefits Q Net Benefits Maximum net benefits Q* Slope = MNB 1- 24

25. The Time Value of Money Present value ( PV ) of a future value ( FV ) lump-sum amount to be received at the end of “ n ” periods in the future when the per-period interest rate is “ i ”: Examples: Lotto winner choosing between a single lump-sum payout of $104 million or $198 million over 25 years. Determining damages in a patent infringement case. 1- 25

26. Present Value vs. Future Value The present value ( PV ) reflects the difference between the future value and the opportunity cost of waiting ( OCW ). Succinctly, PV = FV – OCW If i = 0, note PV = FV . As i increases, the higher is the OCW and the lower the PV . 1- 26

27. Present Value of a Series Present value of a stream of future amounts ( FV t ) received at the end of each period for “ n ” periods: Equivalently, 1- 27

28. Net Present Value Suppose a manager can purchase a stream of future receipts ( FV t ) by spending “ C ” dollars today. The NPV of such a decision is Decision Rule: If NPV < 0: Reject project NPV > 0: Accept project 1- 28

29. Present Value of a Perpetuity An asset that perpetually generates a stream of cash flows ( CF i ) at the end of each period is called a perpetuity. The present value ( PV ) of a perpetuity of cash flows paying the same amount ( CF = CF 1 = CF 2 = …) at the end of each period is 1- 29

30. Firm Valuation and Profit Maximization The value of a firm equals the present value of current and future profits (cash flows). A common assumption among economist is that it is the firm’s goal to maximization profits. This means the present value of current and future profits, so the firm is maximizing its value. 1- 30

31. Firm Valuation With Profit Growth If profits grow at a constant rate ( g < i ) and current period profits are p o , before and after dividends are: Provided that g < i . That is, the growth rate in profits is less than the interest rate and both remain constant. 1- 31

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